Which of the following is NOT true regarding equity indexed annuities?

• A. Their returns are typically linked to a specific stock market index.
• B. They may include caps or participation rates that limit potential returns.
• C. They offer unlimited participation in stock market gains.
• D. They guarantee a minimum return regardless of stock market performance.

Answer: (C)

Verified step by step guidance

1. Understand the concept of equity-indexed annuities: These are financial products that combine features of fixed and variable annuities. Their returns are linked to a specific stock market index, such as the S&P 500, but they also provide a guaranteed minimum return.
2. Analyze the first statement: 'Their returns are typically linked to a specific stock market index.' This is true because equity-indexed annuities derive their returns based on the performance of a stock market index.
3. Analyze the second statement: 'They may include caps or participation rates that limit potential returns.' This is also true. Caps set a maximum limit on returns, and participation rates determine the percentage of the index's gain that the annuity holder will receive.
4. Analyze the third statement: 'They offer unlimited participation in stock market gains.' This is NOT true. Equity-indexed annuities typically have caps or participation rates that limit the extent to which the annuity holder can benefit from stock market gains.
5. Analyze the fourth statement: 'They guarantee a minimum return regardless of stock market performance.' This is true because equity-indexed annuities are designed to provide a safety net by guaranteeing a minimum return even if the stock market performs poorly.